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Wed 07 Nov 2018

Buying your home off-plan can be taxing

A recent case has highlighted that when buying off-plan an unexpected tax liability can be imposed.

The general rule is that purchasing and thereafter selling your only or main residence will be exempt from Capital Gains Tax. However, a purchase off-plan where there is a delay between exchange of contracts and completion can result in the buyer being subject to a Capital Gains Tax liability when the buyer subsequently sells the property even though it comprises the seller’s only or main residence.

In the case in question, the buyer exchanged contracts in October 2006 but the transaction did not complete until January 2010. The reason was that the development was delayed because of the credit crunch. The purchase price was £575,000.00.

The buyer then sold the property in January 2012 for £1,215,000.00, therefore making a profit of £640,000.00.

The original buyer claimed relief from Capital Gains Tax as the property was his main residence throughout the period of ownership.

HMRC disagreed with this on the basis that between 2006, when contacts were exchanged, and 2010, when the transaction completed, the buyer did not occupy the property. Indeed, he could not have done because the building works had not been completed.

In this case it was determined that the Capital Gains Tax exemption did not apply to the period when the buyer was not in physical occupation of the property. The consequence was that the gain was assessed over the full period of the buyer’s ownership (i.e. between 2006 when contracts were exchanged and 2012 when the property was sold) and only relief from Capital Gains Tax was available for the period from when the buyer actually occupied the property as his main residence.

This resulted in a liability of £61,383.00.

In the circumstances, buyers who are purchasing with a delayed completion of more than 1 year should check with HMRC whether or not they will make a charge for Capital Gains Tax should such a gain arise.